Are Mutual Funds in Your Future

Following commercial banks and insurance companies, mutual funds represent the third largest segment of the nation's financial industry. More than 3,000 mutual funds had aggregate net assets in excess of $1 trillion at the end of 1989. The explosive growth of mutual funds in recent years has attracted the attention of They view the funds as a cost-efficient way to deliver professional investment management services and as an easy way to broaden their product and service offerings. Why bother? All banks interested in implementing mutual programs do not have the same goals for doing so, but there seem to be some basic similarities: * Diversified revenue streams-fee income. These days, banks are placing increasing emphasis on diversifying revenue streams from traditional net interest margin businesses, thereby providing a greater balance to earnings and increased financial stability. Banks can perform a number of basic services (such as investment advisory) for mutual funds and for their customers who invest in them, from which significant fee income can be generated. Mutual funds produce fee income from a variety of administrative and advisory services that banks perform for the or for the customers who invest in them. * Strengthened customer relationships. Mutual funds can strengthen existing customer relationships by expanding product and service offerings. Mutual funds represent an efficient way of delivering investment advisory services in both the and trust environments. * Complement to other bank products. Mutual funds can be readily integrated with other bank products and services, thus enhancing the bank's image as a comprehensive financial service provider. * Expanded customer base. Banks that have entered the mutual business say that the products provide a new and separate opportunity to attract new customers, a benefit not strictly limited to objectives. * Existing capabilities leveraged. Proprietary funds, in particular, offer a bank the opportunity to leverage its existing investment advisory and other capabilities. In this sense, the earnings produced are incremental revenues and can improve profit margins significantly. * Marketing efficiencies. Packaging investment advisory services in the form of a mutual offers a more efficient way for a bank to market this capability to the public. Not only that, a mutual can provide an effective and efficient way for the bank's investment performance to be published, which is impossible to do with common trust funds under current regulations. * Increased market value. There are case studies that show that for the past five years, the marketplace has consistently placed a higher value on so-called retail banks. Many bankers see mutual funds as a fundamental component of a strategy. Make or buy alternatives. Banks interested in offering mutual funds face the choice of offering proprietary or funds. A proprietary (also known as a private label fund) typically refers to a mutual for which a bank serves as investment adviser and, in many cases, performs other functions for the fund, such as administrative and custody services. The term third-party fund typically refers to a sponsored and served by entities other than the bank. The bank uses these funds to meet certain needs of its customers. Whether a bank seeks to develop its own proprietary or use a depends on several factors. For example, does it plan to use mutual funds for institutional or purposes? How strongly does it feel about product identification with the bank? Will the use of a brand name be more effective for marketing purposes? Which approach will produce better bottom line results? And how quickly can the product be introduced into the bank's marketplace? Going third party. …